Micro Chapter 2/9
Writing in the New York Times, Michael Lewis argued that "...a market economy is premised on a system of incentives designed to encourage an ignoble human trait: self-interest." What incentives does a market system provide to encourage self-interest? A. Financial reward. B. Selfishness. C. Equity. D. Government sanctions. E. Both a and b.
A
Whether carried out by an individual or a country, production beyond the production possibilities frontier A. is not physically possible. B. happens as a result of forced saving. C. can occur by acquiring more productive resources. D. is possible only through trade. With respect to consumption, individuals and countries A. are contrained to consume on or inside their production possibilities frontiers. B. can, through trade, consume beyond their production possibilities frontiers. C. can consume beyond their production possibilities frontiers only during periods of economic prosperity. D. can, by choosing not to save for the future, consume beyond their production possibilities frontiers.
A, B
What is absolute advantage? A. The ability to produce more of a good or service than competitors using the same amount of resources. B. The gain from selling a product for more than it costs to produce that product. C. The ability to produce a good or service at a lower opportunity cost than other producers. D. The gain from consuming a product whose benefit is greater than its cost. E. The ability to use all available resources to produce output. What is comparative advantage? A. The gain from consuming a product whose benefit is greater than its cost. B. The gain from selling a product for more than it costs to produce that product. C. The ability to produce more of a good or service than competitors using the same amount of resources. D. The ability to use all available resources to produce output. E. The ability to produce a good or service at a lower opportunity cost than other producers. Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good A. will not have a comparative advantage because it has fewer resources. B. will have a comparative advantage if it is able to produce that good at a low total cost. C. will have a comparative advantage if it has a lower opportunity cost of producing that good. D. will have a comparative advantage if it produces more efficiently. E. will have a comparative advantage if it devotes more resources toward that good's production.
A, E, C
An opinion column in the New York Times by Donald J. Boudreaux of George Mason University is titled "Trade Is Not a Job Killer." In the column, Boudreaux notes that work by MIT economist David Autor and colleagues estimates "that trade with China from 1999 to 2011 destroyed 2.4 million jobs in the United States." If trade with China during that period, often called the "China shock," destroyed 2.4 million jobs, how can Boudreaux claim that "trade is not a job killer"? A. Trade with China eliminated only manufacturing jobs and the fraction of U.S. workers employed in manufacturing had begun to decline long before the China shock began. B. While trade with China eliminated jobs in U.S. companies that were less efficient than foreign companies, it also created new jobs in U.S. companies that export products to foreign markets. C. The U.S. Federal Trade Adjustment Assistance program succeeded in increasing total employment in the United States over the same period. D. While trade with China eliminated jobs in U.S. companies that were less efficient than foreign companies, those workers easily found new jobs, and total employment in the United States increased over the same period.
B
The Scottish philosopher Adam Smith argued in 1776 that A. guilds would do a better job of coordinating the activities of buyers and sellers than prices could. B. prices would do a better job of coordinating the activities of buyers and sellers than markets could. C. unions would do a better job of coordinating the activities of buyers and sellers than prices could. D. prices would do a better job of coordinating the activities of buyers and sellers than guilds could.
D
Some economists have been puzzled that although entrepreneurs take on the risk of losing time and money by starting new businesses, on average their incomes are lower than those of people with similar characteristics who go to work at large firms. William Baumol believes part of the explanation for this puzzle may be that entrepreneurs are like people who buy lottery tickets. On average, people who don't buy lottery tickets are left with more money than people who buy tickets because lotteries take in more money than they give out. Baumol argues that "the masses of purchasers who grab up the [lottery] tickets are not irrational if they receive an adequate payment in another currency: psychic rewards." The term "psychic rewards" refers to A. financial payments that boost one's psyche. B. rewards that accrue from the use of psychic powers. C. nonmonetary forms of remuneration that are psychologically uplifting. D. gains attained by "out psyching" one's foes. Psychic rewards that an entrepreneur might receive include (check all that apply): A. stock options. B. the pride of self-accomplishment. C. status within the community. D. being one's own boss.
C B, C, D
We do not see complete specialization in the real world because A. not all goods and services are traded internationally, production of most goods involves decreasing opportunity costs, and tastes for products differ. B. not all goods and services are traded internationally, production of most goods involves constant opportunity costs, and tastes for products are remarkably uniform. C. all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products are remarkably uniform. D. not all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products differ.
D
Which of the following events would create economic growth, that is, shift the production possibilities frontier outward? A. An increase in the available natural resources. B. An increase in technology that affects the production of both goods. C. An increase in the available labor. D. All of the above.
D
Identify whether each of the following transactions will take place in the factor market or in the product market and whether households or firms are supplying the good or service or demanding the good or service. George buys a Tesla Model S. This takes place in the _________ market. The household _________ the good and the firm ________ the good. Tesla increases employment at its Fremont plant. This takes place in the _______ market. The households _______ the labor and the firm _______ the labor. George works 20 hours per week at McDonald's. This takes place in the _______ market. The household _________ the labor and the firm _________ the labor. George sells land he owns to McDonald's so it can build a new restaurant. This takes place in the ______ market. The household ______ the factor of production and the firm _______ the factor of production.
product, demands, supplies factor, supply, demands factor, supplies, demands factor, supplies, demands
In the circular-flow diagram showing how a market system works, A. income flows to households through factor markets. B. households are demanders and firms are suppliers in factor markets. C. income flows to households and the government through product markets. D. firms and households are both suppliers in product markets. E. households purchase output produced by firms in product and factor markets.
A
In economics, the term capital refers to A. physical capital, such as machinery, that is used to produce other goods. B. the process of raising funds from venture capitalists. C. the difference between a firm's assets and its liabilities. D. financial resources used by businesses to hire resources.
A
After Russia seized what had formerly been the Ukrainian territory of Crimea in February 2014, the United States and many other countries imposed economic sanctions that reduced the ability of Russia to engage in international trade. A columnist writing in the New York Times noted that, "If sanctions push Russia onto a path of greater self-reliance, its manufacturing and service industries will surely grow faster...." If the columnist is correct about the effect of the sanctions, then, in the long run, the sanctions will A. decrease the economic well-being of the average Russian because Russia will have to produce some goods and services at a higher cost than its trading partners. B. increase the economic well-being of the average Russian because its manufacturing and service industries will surely grow faster. C. increase the economic well-being of the average Russian because there will more employment to meet the needs of the growing manufacturing sector. D. decrease the economic well-being of the average Russian because there will be lost markets.
A
Choco Fantasy is a firm that produces both dark chocolates as well as liquor chocolates. It can produce 10,000 bars of dark chocolate per month if all its resources are used to produce only this variety. Similarly, using all its resources in the production of liquor chocolates, the firm can produce 8,000 bars per month. However, during a given month, the firm produces both varieties. Which of the following, if true, would suggest that the firm is operating at a point inside its PPF? A. The firm believes in maintaining a certain amount of excess capacity to meet unexpected changes in demand. B. The firm is paying overtime to its workers as most of them are working extra hours to meet the peak season demand. C. Current demand for both varieties is so high that similar chocolates are being imported by the country. D. All resources employed by Choco Fantasy are always put to their best use. E. The firm is planning to hire more resources because of an anticipated increase in the demand for its chocolates.
A
Choco Fantasy is a firm that produces both dark chocolates as well as liquor chocolates. It can produce 10,000 bars of dark chocolate per month if all its resources are used to produce only this variety. Similarly, using all its resources in the production of liquor chocolates, the firm can produce 8,000 bars per month. However, during a given month, the firm produces both varieties. Which of the following, if true, would suggest that the firm is operating on its PPF? A. Most domestic consumers prefer the better quality Swiss chocolates imported by the country. B. Even though the demand for both liquor and dark chocolates has increased, the company can increase the production of only one variety. C. Medical reports earlier this year indicated that higher chocolate consumption increases the risk of heart attack. D. In an attempt to cut costs, the company is planning to fire its unproductive resources. E. The opportunity cost of shifting resources from the production of liquor chocolates to dark chocolates is marginal.
B
A news article described a new prescription drug that costs up to "$94,000 for one 12-week treatment regimen" to treat hepatitis C, which is a liver disease that afflicts as many as 3 million people in the United States. It can result in severe liver damage and even death. It is potentially curable, but the prescription drugs available to treat it are very expensive. State government Medicaid programs provide medical insurance to poor and disabled people. In Louisiana, spending on Medicaid accounts for nearly half of the state government's budget. Rebekah Gee is the secretary of the Louisiana Department of Health. She was quoted as saying that it is unacceptable that many Medicaid patients with hepatitis C are not receiving treatment, "but it's also unacceptable for me to pay over $700 million and have to cut primary education, gut our payments to universities and decimate the health care delivery system for just one disease condition." What trade-offs do state governments face when new prescription drugs are introduced with much higher prices than existing drugs? A. An increase in spending on prescription drugs will decrease the incentive for firms to invent new drugs. B. Increases in spending on prescription drugs will require reductions in other government programs or services. C. Higher prescription drug prices mean that state governments will not be able to balance their budgets. D. State governments won't face any trade-offs since prescription drugs are covered by most Medicaid programs. What factors should state governments take into account when deciding how to allocate the scarce funds in their budgets? A. How best to allocate a state government's limited resources is a normative issue and depends on how governors and state legislators evaluate the trade-offs involved. B. Since state governments' budgets do not have to be balanced, money can be spent on education and health care such that both sectors receive as much money as they need. C. State governments should not have to worry about allocating any money for prescription drugs because this is the patient's responsibility. D. State governments should always allocate enough funds in their budget for prescription drugs so that patients won't die from a disease.
B, A
According to Adam Smith, which of the following is necessary for the proper functioning of the market system? A. For markets to work, the government should help citizens make the right decisions. B. For markets to work, people must be free to pursue their self-interest. C. For markets to work, people and the government need to coordinate their decisions. D. For markets to work, people should take into account how their decisions affect society as a whole. According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity? A. prices B. costs C. government regulations D. financial markets
B, A
A production possibilities frontier: A. shows the market for a good or service. B. shows the maximum attainable combinations of two goods that may be produced with available resources. C. shows how unlimited wants exceed the limited resources available to fulfill those wants. D. shows how participants in the market are linked. E. shows the act of buying and selling. We can show economic efficiency: A. with points on the production possibilities frontier. B. with points inside and on the production possibilities frontier. C. with points on and outside the production possibilities frontier. D. with points outside the production possibilities frontier. E. with points inside the production possibilities frontier. We can show economic inefficiency: A. with points inside the production possibilities frontier. B. with points on the production possibilities frontier. C. with points inside and on the production possibilities frontier. D. with points on and outside the production possibilities frontier. E. with points outside the production possibilities frontier. The production possibilities frontier will shift outward A. if resources are used to produce capital goods. B. if technology declines. C. if production occurs outside the production possibilities frontier. D. if resources are not used in production. E. if resources are used to produce consumption goods.
B, A, A, A
What does De Soto mean by "strong, innovative economic markets"? A. These are markets that use existing technology to produce new goods and services. B. These are markets that search out opportunities to provide new goods and services. C. These are markets that are profitable for entrepreneurs. D. These are markets that use natural resources in the production of goods and services. Why would such markets be important for a country that is hoping to raise the standard of living of its residents? A. There is less international trade with strong, innovative markets. B. Strong, innovative markets result in more economic growth. C. These markets can result in stronger government regulations. D. Strong, innovative markets can result in greater income equality. What do property rights have to do with developing such markets? A. Property rights increase the value of holding cash. B. Property rights decrease the returns from investing. C. Property rights protect firms from unfair competition. D. Property rights make it more likely that investments will be made.
B, B, D
Choco Dream is a firm that produces both dark chocolates as well as liquor chocolates. During a given month, the firm uses its resources to produce both varieties. Initially, the firm produced 5,000 bars of dark chocolates and 4,000 bars of liquor chocolates in a month. In order to increase production of the latter to 4,500, they had to reduce production of dark chocolates by 800 bars. When demand for liquor chocolates increased further, Choco Dream produced 5,000 bars of liquor chocolates and 3,200 bars of dark chocolates per month. Which of the following inferences can be drawn from the given information? A. Resources are equally productive in the production of both types of chocolates. B. The company is operating at one end of the PPF. C. Choco Dream faces increasing marginal opportunity cost in the production of liquor chocolates. D. Both types of chocolates sold by Choco Dream are equally popular among consumers. E. Choco Dream's production possibilities frontier is linear.
C
Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods used to produce other goods. Is it likely that the production possibilities frontierLOADING... in this situation would be a straight line or bowed out A. The production possibilities frontier would likely be a straight line because not all resources are equally well suited to produce both consumption and capital goods. B. The production possibilities frontier would likely be a straight line because resources are likely equally well suited to produce both consumption and capital goods. C. The production possibilities frontier would likely be bowed out because not all resources are equally well suited to produce both consumption and capital goods. D. The production possibilities frontier would likely be bowed out because resources are likely equally well suited to produce both consumption and capital goods.
C
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity. A. more proportional B. more instant C. smaller D. greater
C
In a column in the Wall Street Journal, the business historian John Steele Gordon notes that "the U.S. sells Bangladesh movies and buys its T-shirts. Both nations are better off. Both are richer because of the trade." a. For this trade to happen, what must be true of the opportunity cost of making movies in the United States compared with the opportunity cost of making them in Bangladesh? A. The opportunity cost of making movies must be lower in Bangladesh than in the United States. B. The opportunity cost of making movies must be higher in the United States than in Bangladesh. C. The opportunity cost of making movies must be lower in the United States than in Bangladesh. D. The opportunity cost of making movies must be the same in the United States and in Bangladesh. b. Can we be certain that T-shirts can be manufactured using fewer hours of work per T-shirt in Bangladesh than in the United States? Briefly explain. A. No, while Bangladesh has a comparative advantage in making T-shirts, it may not have an absolute advantage in making them. B. No, while Bangladesh has an absolute advantage in making T-shirts, it may not have a comparative advantage in making them. C. Yes, since Bangladesh has a comparative advantage in making T-shirts, it also has an absolute advantage in making them. D. Yes, since Bangladesh has an absolute advantage in making T-shirts, it can manufacture them using fewer hours of work.
C, A
A columnist for Forbes argues that: "Even if China is always better than Spain at producing textiles, if the best thing that Spain could be doing is textiles then that's what Spain should be doing." What does the columnist mean by writing that China "is always better than Spain" in producing textiles (which include clothing, sheets, and similar products)? A. Consumers have a stronger preference for textiles made in China than those made in Spain. B. Spain will not produce any textiles because China is always better. C. China can produce textiles at a lower cost in terms of resources than Spain can. D. China can produce textile products that are of higher quality than those produced in Spain. Is the columnist arguing that Spain has an absolute advantage over China in producing textiles, a comparative advantage, or both? A. A comparative advantage in producing textiles. B. An absolute advantage in producing textiles. C. Both an absolute advantage and a comparative advantage in producing textiles. D. Neither an absolute advantage nor a comparative advantage in producing textiles. The columnist notes that, in fact, Spain exports significant quantities of textiles. If his description of the situation in China and Spain is accurate, briefly explain how Spanish firms are able to export textiles in competition with Chinese firms. A. Spanish firms must be able to produce textiles in larger quantities than China can. B. Consumers must have a stronger preference for textiles made in Spain than those made in China. C. Spain must be able to produce textiles at a lower opportunity cost than China can. D. If China "is always better than Spain" in producing textiles, Spanish firms would not be able to compete with China.
C, A, C
According to an article in the Economist magazine: "In all rich countries, property rights are secure...Legally recognising land ownership has boosted farmers' income and productivity in Latin America and Asia...More than two-thirds of Africa's land is still under customary tenure, with rights to land rooted in communities and typically neither written down nor legally recognized." a. Which of the following statements regarding secure property rights is true? A. Property rights—which include only physical property (not intellectual rights to new products or the processes used to produce goods and services)—refer to the rights of firms and individuals to have exclusive use of their property. B. It is solely the responsibility of the individuals who own the property to ensure that their rights are protected. C. Property rights provide incentives for people to maintain and increase the value of the property they own. D. All of the above. b. Which of the following statements is true? A. Only rich countries have recognized governments that would even be capable of securing property rights. B. It is easy for a country to become rich even without having secure property rights. C. By protecting private property rights, governments make it more likely that investments will be made in businesses that provide jobs and income for workers. D. Protecting property rights has no impact on a country's standard of living. c. What problems might African farmers have because they lack secure property rights? A. Without secure property rights, farmers are not able to obtain funds by selling some of their land. B. Without secure property rights, it is harder for farmers to borrow because they cannot use their land as collateral. C. Without secure property rights, farmers in Africa may be reluctant to make the investments in their farms that would raise the farms' productivity. D. All of the above.
C, C, D
An editorial in the New York Times discussed whether the federal government should enact regulations that would force firms to accept lower prices when selling pharmaceuticals and medical devices. The editorial notes that European countries that have such regulations "accept a trade-off, inherent in this approach, that the United States has so far resisted: They forgo access to certain innovations, like pricey new drugs and medical devices..." a. Why might price regulations reduce the number of new drugs and medical devices that firms offer for sale? A. Firms decrease the number of new drugs and medical devices they offer for sale in order to spite the government for imposing regulations on them. B. Price regulations reduce the demand for new drugs and medical devices, and therefore firms reduce the number they offer for sale. C. By reducing firms' potential profits from selling new drugs and medical devices, price regulation may reduce the incentive firms have to devote resources to the research and development necessary to develop these products. D. All of the above. b. Suppose that you are the economic adviser to a presidential candidate who is trying to decide whether she should support a proposal that Congress impose such regulations on the prices of pharmaceuticals and medical devices. You need to prepare a report discussing the relevant factors the candidate should consider. Use the concepts of opportunity cost and trade-offs to discuss some of the main issues you would include in your report. The presidential candidate should consider A. the public would be trading off lower prices today for less effective health care in the future. B. whether implementing price regulations could interfere with the operation of the market system. C. whether implementing price regulations on pharmaceuticals and medical devices might lead to Congress imposing price regulations on other goods and services. D. All of the above.
C, D
Among the main sources of comparative advantage are the following: A. climate and natural resources, relative abundance of labor and capital, technology, external diseconomies. B. climate and natural resources, relative scarcity of labor and capital, technology, external economies. C. climate and natural resources, relative abundance of labor and capital, inefficient technology, external economies. D. climate and natural resources, relative abundance of labor and capital, technology, external economies.
D
In economic terminology, the inputs used to produce output are referred to as A. services. B. tangibles. C. durables and nondurables. D. factors of production.
D
The British historian Thomas Macaulay once remarked that copyrights are "a tax on readers." Copyrights are a 'tax' on readers in the sense that A. securing a new copyright requires the payment of a fee to the government by the artist. B. the government explicitly adds a sales tax on creative works to cover the copyright. C. the government collects the tax progressively to promote fairness in the tax code. D. copyrights limit of the supply of related creative work which results in higher prices. If copyrights are a 'tax' on readers, governments provide a legal framework to enforce them because A. the government collects a large amount of revenue from the tax. B. the government needs to solve its debt problem by enacting new taxes. C. copyrights provide needed protection for authors and creators of movies or other artistic works. D. the government likes to tax the people any chance it gets.
D, C
The term external economies refers to A. the reduction of production costs due to increased capacity utilization. B. the benefits a firm receives from firms in other industries being located nearby. C. the process of turning inputs into goods and services. D. the reduction of costs resulting from increases in the size of an industry in a given area. Which of the following is a source of comparative advantage? A. absolute advantage B. autarky C. the relative abundance of capital and labor D. All of the above.
D, C
What does increasing marginal opportunity costs mean? A. Increasing the production of a good requires decreases in the production of another good. B. Increasing the production of a good requires smaller and smaller decreases in the production of another good. C. Production is not occurring on the production possibilities frontier. D. Increasing the production of a good requires larger and larger decreases in the production of another good. E. The economy is unable to produce increasing quantities of goods and services. What are the implications of this idea for the shape of the production possibilities frontier? A. The production possibilities frontier will have a negative slope. B. The production possibilities frontier will be a straight line. C. The production possibilities frontier will have a positive slope. D. The production possibilities frontier will be bowed inward. E. The production possibilities frontier will be bowed outward.
D, E
During the 1928 presidential election campaign, Herbert Hoover, the Republican candidate, argued that the United States should only import those products that could not be produced here. Do you believe that this would be a good policy? Explain. A. This is not a good policy because it does not allow countries to import those goods that are scarce. B. This is a good policy because countries would only produce those goods that they can make at lower opportunity cost than other countries. C. This is a good policy because countries would only produce those goods that cannot be made elsewhere. D. This is not a good policy because it does not necessarily result in countries producing those goods for which they have an absolute advantage. E. This is not a good policy because it does not necessarily result in countries producing those goods for which they have a comparative advantage.
E
The world is often described as having a global economy. How important is international trade to the United States? A. In the U.S., exports are increasing but not as a portion of GDP. B. The U.S. exports fewer goods than any of the other 8 highest income countries. C. In the U.S., exports make up more than half of GDP. D. The U.S. exports more than it imports, resulting in a trade deficit. E. In the U.S., imports are smaller fractions of GDP than in most other countries.
E
What is the circular-flow diagram and what does it illustrate? A. The circular-flow diagram shows how firms are linked through product and factor markets. B. The circular-flow diagram shows the maximum attainable combinations of two products that may be produced with available resources and current technology. C. The circular-flow diagram shows the government's role in markets through taxes and transfer payments. D. The circular-flow diagram shows how households and firms are linked through product markets. E. The circular-flow diagram shows how households and firms are linked through product and factor markets.
E
What is a free market? A. A free market is one where the government restricts how a factor of production can be employed. B. A free market is one without property rights. C. A free market is one with perfect equality. D. A free market is one where the government restricts how a good or service can be produced. E. A free market is one where the government does not control the production of goods and services. In what ways does a free market economy differ from a centrally planned economy? Unlike a free market economy, A. centrally planned economies do not use money. B. centrally planned economies do not trade internationally. C. centrally planned economies have extensive government controls. D. centrally planned economies have no government. E. centrally planned economies have no government restrictions.
E, C
What is the basis for trade? A. Economic growth. B. Efficiency. C. Absolute advantage. D. Available resources. E. Comparative advantage. How can a country gain from specialization and trade? A. A country can specialize in producing that which is most scarce and then trade for other needed goods and services. B. A country can specialize in producing that for which it has an absolute advantage and then trade for other needed goods and services. C. A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services. D. A country can specialize by using all available resources to produce goods and services to avoid trading with other countries. E. A country can specialize by using all available resources to invest in capital goods to promote economic growth.
E, C
What are private property rights? Private property rights are: A. the rights individuals have to the exclusive use of intellectual property and firms have to the exclusive use of tangible, physical property. B. the rights individuals but not firms have to the exclusive use of tangible, physical property and intellectual property. C. the rights individuals and firms have to the exclusive use of tangible, physical property but not intellectual property. D. the rights individuals and firms have to the exclusive use of intellectual property but not tangible, physical property. E. the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property. What role do they play in the working of a market system? Private property rights: A. encourage a significant number of people to be willing to risk funds by investing them in business. B. encourage firms to spend money on research and development. C. are the basis for international trade. D. determine what goods and services will be produced. E. both a and b. Why are independent courts important for a well-functioning economy? Independence is necessary for courts: A. to make their decisions based on the law. B. to make their decisions free of intimidation by criminal gangs. C. to make their decisions free of influence from other parts of the government. D. to make their decisions free of influence from people with powerful political connections. E. all of the above.
E, E, E
In an opinion column in the Wall Street Journal, economist Richard McKenzie of the University of California, Irvine wrote: "If countries import goods that can be made more cheaply abroad than at home, and produce goods that can be made more cheaply at home than abroad, then all trading nations will end up with more income and wealth than if they tried to produce everything themselves." Briefly explain his reasoning. When countries specialize in producing goods in which they have a _____________ advantage and trade for goods in which other countries have a ____________ advantage, the incomes of all countries increase.
comparative, comparative